With high interest rates taking a bite out of project profits, apartment builders and investors are expecting a slowdown in their business next year.
But the declines in North Texas may be short-lived given the huge demand for rental units in this market.
“Transactions have dropped off substantially,” said John Sebree, senior vice president and national director with commercial property firm Marcus & Millichap. “But the fundamentals of multifamily are rock solid.
“The Texas markets are continuing to grow.”
With borrowing costs about double where they were at the start of the year, Sebree told apartment industry professionals at a Thursday meeting that most developers next year are planning less than half the rental unit starts they’ve had in recent years.
And the number of apartment property sales in the D-FW area will decline, he said.
“The last few years have been at a high level of velocity — probably unsustainable,” Sebree said.
Through the first nine months of this year, investors have purchased more than $18 billion in D-FW apartment properties — the most of any U.S. metro area, according to a new report by MSCI Inc.
Sebree said despite the economic slowdown, Texas’ major metro areas will see continued apartment demand because of the large number young people moving to the area for jobs.
“In five years there will be 300,000 more 20 to 34 year olds in the Texas metros,” he said. “Texas as we look at the four major metro areas, is outpacing everybody else.”
The D-FW area in the next five years is expected to add 114,200 residents in the prime rental ages. And Houston is forecast to see 101,900 new residents between 20 and 34, Sebree said.
“You have so many people coming to Texas,” he said.
Dallas-Fort Worth currently leads the country in apartment building, with about 25,000 new rental units scheduled to open their doors here this year.
More than 60,000 apartments are under construction in North Texas.
High-housing costs are locking many first-time buyers out of the ownership market, Sebree said and thousands more apartments are needed.
Home sales in North Texas are down more than 20% from a year ago.
“One of the things that helping multifamily right now is the tremendous increase in home costs,” Sebree said. “There aren’t enough homes for people to buy.
“They are staying in apartments longer,” he said. “We still have a housing crisis.”
Only about 5% of D-FW-area apartments were vacant at the end of September.
And North Texas rents during the most recent quarter were up 13.4% year-over-year.
“Rent growth in 2023 is going to come down quite a bit,” Sebree predicts.
Unlike in previous downturns, there is plenty of money to lend and invest. But the costs of those funds are unworkable for many builders.
“The capital is out there but they are pricing it for risk - the price is high,” said Ben Brewer in the Dallas office of developer Hines.
Property brokers say that the high cost of borrowing has already caused commercial property prices to decline by 15% to 20% or more.
“Deals that might trade today might trade blow replacement costs of projects starting today,” said Jason Haun with builder Zom Living.
